Oliver Wyman’s Scott McDonald on the Middle East’s Risks and Challenges for Development and Governance

To the outsider, the Middle East seems volatile and wracked with major security challenges stemming from Iranian threats, civil war in Syria and ongoing unrest in the Arab Spring countries. But for most business leaders in the region, larger environmental and economic issues are viewed as greater risks: water scarcity and rising food prices, any global economic slowdown, and youth unemployment. And despite the region’s political tumult, the majority of executives in the Gulf report confidence in their governments’ handling of crises.

Such insight that counters prevailing wisdom of the region was to be found in the latest batch of annual surveys conducted by New York-based consulting firm Oliver Wyman, one on global risks, and another on senior executive sentiment in the Middle East.

The survey on senior executive sentiment, carried out in conjunction with polling firm Zogby Research Services, found growing concern in Saudi Arabia, the region’s largest economy. Optimism and confidence levels in the Kingdom were at 61%, the lowest rating since the surveys began in 2009. Additionally, 63% of Saudi executives said they were "satisfied with their government’s handling of economic challenges" also the lowest score for the country in the history of the survey.

Meanwhile, 80% of executives reported confidence in the United Arab Emirates (UAE), which has experienced a recovery since the Arab Spring began. Notably, the urgency for reform in the wake of the Arab protest movement has dropped across the region, the survey also found.

The consulting firm continues to build its presence in the Middle East, and its newest president comes with a background well suited to understand the region. A native of Toronto, Canada, Scott McDonald’s family moved to the Gulf in 1978 when his father accepted a position at King Faisal Specialist Hospital and Research Center in Riyadh, Saudi Arabia. His family later moved to Oman, where his father was involved in the set up of the medical faculty at Sultan Qaboos University near the capital of Muscat, before moving to Dubai.

McDonald’s family was among the first expatriate families in a city that had not yet become the glitzy, skyscraper-filled metropolis as it exists today. "We lived right near Jumeirah Beach but there was no hotel, no developments or anything, and our small compound was about the only thing that existed," he recalled.

McDonald sat down with Arabic Knowledge@Wharton in Dubai, outside the firm’s fourth annual CEO conference in the Gulf. Reflecting on the changes the city has seen since his childhood, McDonald noted the ongoing challenges that still face the region in governance and development. He also spoke about his personal goals for the consulting firm, and the direction he hopes to guide it along.

An edited transcript of the conversation follows.

Arabic Knowledge@Wharton:You spent part of your childhood in the Gulf. Can you compare what it was then and where they are now? Was there anything that you wanted to see them develop, and did they accomplish those things?

Scott McDonald:When I was first here, the region was all about aspirations. It was basically a desert. So when we lived in Riyadh, it was relatively tiny. The desert came right up towards the center of the town, and the King Faisal Specialist Hospital and Research Center was right on the edge of the desert. Now the hospital is at the center of a gigantic city all around it. The area was full of Yemeni shacks that sold scrambled eggs in the morning. So it was completely different. Dubai was the same, and Oman as well.

There was a lot of talk then about what could be accomplished and what they could build. It was the beginning of the 80s, and the oil money was starting to be understood. So it’s changed enormously. They’ve clearly succeeded in building something. I’m not sure they’ve succeeded in building what they wanted to build, but clearly they have come a very long way.

There’s an infrastructure in place, there’s an ambitious populous in place, and they are refining what they want their politics to look like, what they want their governance to look like. And [there is] a much more sustainable and competitive offering to the world, which they are pretty thoughtful about, I must say.

Arabic Knowledge@Wharton:Your firm’s latest report on global risks provides some unconventional insight into what businesses and leaders here consider the biggest risks for the region.

McDonald:If you ask what does everyone outside the Middle East think the risks are, they’ll list them in terms of political instability, wars in the region, terrorism, and Shiite-Sunni sectarianism. But then you see the Oliver Wyman-Zogby research, which shows exactly the opposite. If you’re in the region, those risks are very low. The risks they’re most concerned about here are global, macroeconomic forces, because they clearly can’t exist if the global economy is grinding to a halt. I hope this isn’t an arrogant opinion from the outside — I still think they underestimate the political and governmental risks they have.

Arabic Knowledge@Wharton:Do you feel that way because of the ongoing conflict in Syria, for instance, or the questions regarding the sustainability of large subsidy efforts undertaken to prevent civil unrest in the Gulf region?

McDonald: It’s more fundamental than that. I think if ultimately the line of power is tightly controlled, I think you have some long-term instability built into the system. At the same time, our systems around the world aren’t proving robust at the moment. In fact, there may be a time in crisis when some of the systems that are more tightly controlled work quite well.

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Arabic Knowledge@Wharton:There are examples in the region of tighter controls working to at least maintain stability and prevent unrest from spreading.

McDonald:Although Bahrain seems to be a good example of how you can get it wrong. I’ve spoke with some people at our conference today and they told me that until recently there were big businesses and ambitions in Bahrain, and that’s all gone now and come to Dubai.

Arabic Knowledge@Wharton:As our experts have previously commented, you can’t have change without civil institutions, and those can’t simply be injected into societies with immediate results. What then would you counsel governments grappling with demands for reform and change?

McDonald:One of the most important things — and it’s startling to hear how strong you can pick it when you are here compared to when you are in Europe — is that wealth drives many things, good and bad. But it’s very hard to build a properly functioning society unless you have a number of businesses pursuing wealth generation and job creation. And it does seem like many of the really good initiatives here are freeing the system and allowing businessmen to operate. That’s the number one thing that you need to have in place. More and more people get employed, and more and more people get empowered to have a view on direction. At the same time, you can build all the institutional capabilities you need around that. I don’t mean to be patronizing at all; I think in Dubai they’ve done all that. The business enterprises are flourishing, they have taken advantage, and they’re building all things around it on the governmental side that they need. So I think they are making progress.

Arabic Knowledge@Wharton:Oliver Wyman also conducted its latest survey on executive attitudes in the region, and though there was a dip from last year, the majority of respondents still were confident in their government’s response to crisis. But the outsider views the region more pessimistically — there’s Syria, Iran, ongoing terrorism threats. Can you account for this difference of opinion?

McDonald:I think we outsiders are bringing our biases. All of my lifelong friends from the Middle East, what they tell me is that, ‘Every year of my life, I’ve faced all this stuff, and my father before me faced all this stuff. You guys have no idea what’s going on.’ We’ve had such a long tradition of stability in parts of the West, at least since the Second World War, that I don’t think we understand what it means to live in a region like this. Even my colleagues who live here are constantly lecturing us. I, as the head of the business, if something should happen, I’ll ask how they feel about our business in, say, Libya, and should we be bringing everyone home and shutting it down, and they say, you’ve got to understand, the region is more unstable than the region you’re used to.

Arabic Knowledge@Wharton:Though as the UAE Foreign Trade Minister Sheikha Lubna Al Qassimi said, the number one factor for success in this region is stability. Businesses can take their money anywhere. The Gulf countries that have maintained stability have been clear winners in the Arab Spring.

McDonald: It’s just, what is the definition of stability? If you live [in Canada] stability is a different thing than living here. You have deep-rooted problems in the Middle East that have been here for a long time, and will be for a long time to come. Take the reaction from the group today to the Sunni-Shiite issue: It’s just not nearly as much of an issue as outsiders might think.

Arabic Knowledge@Wharton:An economic question that came up in the discussion is the question of duplication. Everyone in the Gulf wants to be an airline hub, a logistics hub, and a destination for tourists. Everyone is trying to take advantage of the geography that puts the region between the West and the East. Can there be many hubs here, or not?

McDonald:What I sense from around the world is that everyone has the same plans in these regards. They all just tweak a few things and it fits. So Russia also describes why it’s at the center of the world, and why there are a bunch of historical reasons — culturally, economically, just because of their relationships with others, that they should be able to build a financial center, and all sorts of things. Across the Middle East there are several competing views on that; Turkey is another great example of that view. Europe still claims to have that view that they should roughly be at the center of the world. All of the Southeast Asian countries have a strong view that they should be building that, having successfully built things in Singapore and Hong Kong. We see inquiries from New Zealand that put forward the case that somehow they are at the center of the world. Everyone is building slightly overlapping propositions.

First of all, there’s more than enough business to go around for everyone. I don’t think there will be outright winners and outright losers. As long as there are some unique pieces to these, I think everyone can probably win. But at the same time, some will win much more than others. It will come back to just how credible the cases are. A good example, since we were talking about stability today, I was at a bank breakfast and there was a survey about whether Russia will be a financial center. All the answers were that it was too difficult, with the corruption, the lack of infrastructure, and a bunch of other things, and I think these will determine it in the end.

Arabic Knowledge@Wharton:In this region, though, you have three major airline carriers all within an hour of each other. In fact, Etihad and Emirates are in the same country. Dubai has its commercial ports, and now Abu Dhabi is developing its Kizad industrial zone and Khalifa port. You not only have international rivalries here, you have intra-national rivalries also.

McDonald:I have a different perspective on the issue. I don’t for a second understand the Middle Eastern airlines business, but the idea that there could be three competing airlines for very similar business actually fills me with joy in a way, because either there’s enough business for all three of them to make money, or there isn’t and some will go out of business. But in the meantime there’s healthy competition to develop services and do all the things that businesses have to do when they compete. I’d be more worried if there was just one, that somehow it was decreed that there would be just one airline. So that to me feels quite natural, and the market will tell me whether it supports three airlines or not.

Arabic Knowledge@Wharton:Here in the Gulf, we’ve witnessed retrenchment from governments as they try to reassess projects and budgets. In this climate what advice would you have for governments and for contractors seeking business?

McDonald:Trying to determine how government contributes to growth seems to be now one of the trickiest things, of all things in all parts of the world. It seems like if you’re in a region like the Middle East, it might be slightly less complex because there are such obvious infrastructure build requirements. If you are to organize that in a competent and efficient way, you should be facilitating some mix of private and public growth.

In the specific area where you know it’s going to be driven by government involvement of some sort, the first step has got to be actually working in an open and productive way with the government, helping them, and trying to position afterwards for you to be able to take advantage of the benefits, but there’s probably going to be a fair bit of education and investment required up front to actually help them understand how to do it; often without a good rulebook on how to do it in many places, actually.

Arabic Knowledge@Wharton:How do companies manage that uncertainty then? The learning curve in this region can be steep for companies unaccustomed to the culture and way of doing business here.

McDonald:My observation is, they say it’s different doing business everywhere in the world. I certainly have found it subtly different, there are cultural differences, and there are differences in ways of behavior. If you strip away some of this, doing business in most parts of the world is the same. You try and find people that you trust, and you agree on what you’re doing, and then you go about it in the same way. I think the bigger challenge is that some of the challenges in the Middle East are so monumental from an infrastructure perspective, and you need to understand that you have to invest huge amounts up front for what may be a risky return. My business is simpler: We market and we hopefully sell something and we get immediately paid for it. The guys who manage the big infrastructure businesses around the world, ordering planes or building roads, there’s clearly a big science to this that they understand.

Arabic Knowledge@Wharton:There’s another monumental challenge in this region, that being the youth bulge and the need to create jobs.

McDonald:I don’t know if we have good solutions for this anywhere in the world. Where we have the same challenges in Europe and North America, we haven’t done a great job dealing with it either. You look at the spots with bad economies, like Spain. The youth unemployment problem is disastrous. It seems to me that you need to solve it quite early on. This is one of the challenges of the Middle East, that it’s upon us, and we don’t have a solution for it.

Arabic Knowledge@Wharton:Does the social spending programs that Gulf countries unveiled after the Arab Spring run counter then, to the desired goals to see young people here become entrepreneurs and employed? What incentive are they getting to pursue a career?

McDonald:I think they clearly run counter, but I think in almost all times of crisis, you see policies that all run counter to each other. If I looked close to home, either in the U.K., Canada or the U.S., how we dealt with the banking crisis over the past couple of years, we did many things that ran counter to our beliefs on how you should run a banking system.

Arabic Knowledge@Wharton:You’ve recently taken over the role of president at Oliver Wyman. What are your goals going forward?

McDonald:We built the firm from nothing in the mid-80s, and we had to have something unique to take to market, because we had some fearsome competitors. And so the approach we took was to double-down on specialization, know more about the industries than anyone else, and then the second thing was to double down on globalization and global expertise. The combination of these two things is when you hire Oliver Wyman as a client, you get more specialized expertise and you get it pulled from anywhere in the world. We’re not constrained by country P&Ls or region P&Ls, and we’re organized by industry. So those have worked incredibly well, and we’ve built our whole foundation on them. But to some extent, they’ve come at a cost of internal cohesion. To drive specialization, we’ve divided Oliver Wyman into many different buckets. That was fine, it was a conscious choice. But specialization is now so embedded in the culture of what we do, we’re tying to take a step back and let’s do some obvious things. There are many things we can share and make use of across the whole group, there are many ways we can cooperate and come up with new ideas, new solutions, if we actually work as one firm without losing the specialization.

It’s not really revolutionary stuff, it’s basic business stuff that we’re trying to do, that stems from a fairly radical choice we made around the business model. We’ll get this done, it will work but it will take some time. It’s turning eight firms into one, that’s a challenge in itself; but turning eight firms into one, without losing that ethos of hard specialization of the eight different places.

Arabic Knowledge@Wharton:Regarding the Middle East, this was the fourth annual conference your firm has done in the region. Do you have any specific goals for the region?

McDonald:When we did our big think about growing markets around the world several years ago, and you had a chance to look at Brazil, Russia, China, Asia and the Middle East, our conclusion was the most natural place for us to make an impact and build would be the Middle East. We were one of the few consulting firms that reached that conclusion. So we started to build here, and to date the areas we have focused the most on have been telecoms, financial services and energy. I think we’ll continue to build all three of those; it’s obvious in the Middle East you need a bigger public sector business, so we’ll build the public sector faster than others, and then we may add specific sectors. Some we’ll add this year –we’ll add healthcare, which is a big specialty of ours.

Also, one of the things about Oliver Wyman is that even though we’re trying to build this idea of one firm, we’re going to be niche players in the sectors we choose to focus on because we only want to focus on sectors that value specialization.

Arabic Knowledge@Wharton:As a consultancy then, what do you need to do right, especially if you are operating on a global scale?

McDonald:This is pretty simple, it’s just hard to execute. You need to have a distinct offering that clients value. That’s the most important thing, that it is actually different from others. I think all of the big consulting firms that continue to survive do have a distinct offering. You need a culture that holds yourself together, because you’re a group of very free-minded, free-spirited individuals, and you need a culture that holds them together or else they’ll spiral off. And you need a business model that makes money, and generates significant returns. If you look at the failures over time, at least one of those things was enormously flawed.

Arabic Knowledge@Wharton:What sort of leadership lessons that you’ve learned will guide you in your new role?

McDonald:It’s almost a funny question, because the first thing you realize as the leader of a consulting firm,, whether you like it or not, is that you’re not really the leader. You are chief partner of a group of very talented senior partners who have their own views. If you want a real executive job with a lot of line authority then it’s the wrong business to be in. Despite that, there’s a lot of leadership you can show in the business by making sure the culture remains strong, making sure you get the right people in the business, doing all the normal things, like setting the right direction, having a clear vision that the group can buy into. But the main task of a leader is to increase the health of the partnership.

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